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In Re: M/s. K Sera Sera Digital Cinema Pvt. Ltd. v/s Digital Cinema Initiatives & Others

    Case No. 30 of 2015

    Decided On, 08 June 2016

    At, Competition Commission of India

    By, MEMBER
    By, MEMBER
    By, MEMBER
    By, MEMBER
    By, MEMBER

    For the Informant: Pallav Shishodia, Senior Advocate, Rachit Batra, Babul Biswas, Advocates. For the Opposite Parties: R1, R7, ----, R2, Saikrishna Rajagopal, Subodh Prasad Deo, Radhika Seth, R3, P. Ram Kumar, Mansi Tewari, Varun, R4, Raja Ratan Bhura, R5, Balbir Singh, Senior Advocate, Akshay Nanda, Abhishek Baghel, R6, Samir Gandhi, Kadam Bari Chinoy, Advocates.

Judgment Text

1. The proceedings in the present matter was re-initiated by the Competition Commission of India (the ‘Commission’) based on the directions from the Hon’ble Competition Appellate Tribunal (‘COMPAT’) vide its order dated 08.12.2015 in Appeal No.79/2015.

2. Earlier, the information in present case was filed by M/s K Sera Sera Digital Cinema Pvt. Ltd. through its Regional Head (North) Mr. Dheeraj Salian ( the ‘Informant’) under Section 19(1)(a) of the Competition Act, 2002 (the ‘Act’) against Digital Cinema Initiatives (‘OP 1’), the Walt Disney Company India/ UTV Software Communications Ltd. (‘OP 2’), M/s Fox Star Studios (‘OP 3’), M/s NBC Universal Media Distribution Services Pvt. Ltd. (‘OP 4’), Sony Pictures (‘OP 5’), Warner Bros. (‘OP 6’) and Paramount Films India Ltd. (‘OP 7’) alleging, inter-alia, contravention of the provisions of Sections 3 and 4 of the Act.

3. The Commission, finding no prima facie case of contravention of any of the provisions of the Act, vide its order dated 22.04.2015 had closed the matter under the provisions of Section 26(2) of the Act. Subsequently, the Informant preferred an appeal before the Hon’ble COMPAT against the said order of the Commission. The Hon’ble COMPAT set aside the said order of the Commission and remitted back the matter to the Commission for reconsideration with the observation that the Commission while at its reconsideration shall, inter alia, also examine the potential of technical regulations in creating anti-competitive conditions and establishing monopolistic conditions. Hence, the present order.

4. As per the information, the Informant, an ISO 9001 2008 certified company having its head office at Mumbai, is a digital cinema service provider and has been engaged in the business of digital cinema services i.e., digital projection and screening of films in India through a specific own proprietary technology known as Sky Cinex Technology. It is stated that the Informant is one among India's leading digital cinema service providers having tie-up with as many as 300 cinema theatres across the country and the technology used by the Informant is stated to be at par with the other leading digital cinema service providers across the world. It has its projectors and servers installed and connected to over 300 movie theatres across India to provide its digital cinema services.

5. OP 1 is stated to be a joint venture formed by the parent companies of OP 2 to OP 7 such as Disney, Fox, Sony Pictures Entertainment, Paramount Pictures, Warner Brothers and Universal Studios who are different international cinema production houses. As per the information, OP 2 to OP 7 are the companies responsible for release and distribution of movies produced by their parent companies in India.

6. The Informant has alleged that OP 1 is a cartel formed with an objective to dominate and monopolise the market of digital cinema exhibition in India and elsewhere. It is alleged that OP 2 to OP 7 have entered into an anti-competitive agreement in the form of OP 1 to release their movies in India in digital form only through Digital Cinema Initiative compliant servers and projectors (DCI-compliant). The said cartel has allegedly forced the Indian companies, engaged in the business of digital cinema technology, to adhere to their standards and conditions even though the Indian companies have better technology. It is alleged that OPs have resolved not to distribute movies to the Informant and similarly placed other companies in India.

7. It is stated that digital cinema refers to the use of digital technology such as hard drives, internet, and dedicated satellite links to distribute or project movies at even the most remote locations. A digital movie server and projector is installed at each cinema hall and the companies such as the Informant have their own proprietary technology to convert/ digitalise the movie content into their proprietary format and then deliver the same to their servers from where the movie is played. The whole system is encrypted/ highly protected and can only support the respective server. The same cannot be played or copied on any other medium. It could be opened and operated through keys provided by the digital cinema service providers such as the Informant. After converting such films/ movies in respective proprietary formats in the state of the art secured labs such films are given in hard disks/ pen drives to various theatres for exhibition, screening and showing.

8. It is further stated that the whole digital cinema has two categories. The first is D-cinema for which technical requirements/ specifications are defined by OP 1. The DCI-compliant standard requires 2K or 4K resolution projectors with a defined minimum contrast ratio, precise brightness level on screen and a calibrated minimum colour gamut. The second category is E- cinema, which includes all other equipments/ technologies which are not approved by OP 1 i.e., non DCI-compliant. E-cinema typically uses 3-chip Digital Light Processing (DLP) projectors, which produce better quality than 35mm film in most situations.

9. The Informant has stated that its proprietary, Sky Cinex Technology is a non-DCI compliant technology but is not inferior to DCI-compliant technology/ equipments. Rather, it is stated that various E-cinema technology platforms including the technology of the Informant are better than the DCI-compliant technology both in quality and security. It is also stated that the manufacturing and installation charges for DCI-compliant equipment are much higher than the non-DCI compliant equipments.

10. It is alleged that the Informant and similarly placed other companies are not allowed by the OPs to exhibit/ screen the movies produced by them. OPs have compelled the cinema theatre owners as well as the digital cinema technology companies across the country to adopt and use servers and projectors specified by them and that too only from their list of manufacturers/ vendors or else loose the business of screening/ exhibition of the movies produced by them.

11. It is stated that the theatres in which the technology/ equipment of the Informant and similarly placed other companies are installed also want to screen Hollywood movies for their audience but the theatre owners are being deprived from playing Hollywood movies. That, the Bollywood producers have not placed any such restriction in the form of technological conditions on the Informant or other similarly placed companies. The theatre owners are left with two options, either to abstain from playing Hollywood movies and play only Bollywood movies or to install the expensive equipment technology certified and accredited by OPs.

12. The Informant has submitted that OP 2 scheduled the release of its movie ‘Avengers Age of Ultron‟ in India on 24.04.2015 only through DCI-compliant theatres. It is alleged that in order to defeat competition in the digital cinema market, control the prices for cinema services and to prevent other market players OPs have entered into an anti-competitive agreement to restrict the rights of the Informant and similarly placed other players by releasing the said movie only in DCI-compliant theatres.

13. The Informant has alleged that: (i) OPs are imposing their revenue sharing agreements on the cinema theatre owners which leads to increase in the ticket prices in contravention of the provisions of Section 3(3)(a) of the Act, (ii) OPs are not allowing the cinema theatre owners to install the servers and projectors of their choice which deprives a large number of viewers from watching movies in a theatre of their choice at a competitive ticket price in violation of Section 3(3)(b) of the Act, (iii) the conduct OPs result in tie-in arrangement as they require the cinema theatre owners and digital cinema technology companies to purchase and use the equipment certified/ accredited by them as one of the conditions to purchase/ play the movie in their theatres in contravention of Section 3(4)(a) of the Act, (iv) OPs are restricting cinema theatre owners from acquiring the equipment of the Informant or other companies which are not certified by OP 1 in contravention of Section 3(4)(b) of the Act, (v) OPs are restricting the cinema theatre owners from dealing with the Informant which is in contravention of Section 3(4)(d) of the Act, (vi) OPs are imposing unfair condition in purchasing, installing and using the DCI-compliant equipment by the digital cinema technology companies and the cinema theatre owners which limits and restricts the provision of services of movie exhibition/ screening and marketing in contravention of Section 4(2)(b) of the Act, (vii) OPs are denying the consumers of cinema theatres which use non-DCI compliant equipment to watch Hollywood movies in their preferred theatres at competitive ticket prices in violation of the provisions of Section 4(2)(c) of the Act, and (viii) OPs are using their dominant position in the movie production to enter into and monopolise the market of digital cinema service providers in contravention of Section 4(2)(e) of the Act.

14. Based on the above averments, the Informant, inter alia, has requested the Commission to issue an order under Section 26(1) of the Act to initiate investigation against the OPs, to direct the OPs to discontinue the said anti-competitive practices and to impose appropriate penalty on the OPs for their anti-competitive conduct.

15. The Commission has perused the information available on record carefully and heard the counsels appearing on behalf of the Informant and OPs again. The submission filed by OP 3 has also been perused. The Commission has also perused the observations of the order dated 08.12.2015 of the Hon’ble COMPAT in the matter.

16. It is noted from the information and the arguments put forth by the advocates appearing on behalf of the Informant during the hearing that the Informant is primarily aggrieved by the conduct of OPs in insisting it and other similarly placed companies to exhibit/ screen the movies produced by the OPs and released in India through DCI-compliant technology only. It is the case of the Informant that the theatre owners including the Informant are deprived from exhibiting Hollywood movies because of the possession of non-DCI compliant equipments/ technology and such restrictions crush the relatively small and technologically independent players in the market which is in contravention of the provisions of Sections 3 and 4 of the Act.

17. The Commission notes that OP 1 was created in March, 2002 as a joint venture by six big Hollywood movie production studios such as Disney, Fox, Paramount, Sony Pictures Entertainment, Universal and Warner Bros. Studios. The primary purpose of OP 1 is to establish and document voluntary specifications for an open architecture for digital cinema that ensures a uniform and high level of technical performance, reliability and quality control. It is observed that the technological changes in the field of cinema projection led to significant transition in film distribution and exhibition across the globe. As stated, at present, two distinct categories of digital cinema such as D-cinema and E-cinema are in use. D-cinema requires 2K or 4K resolution projectors whereas E- cinema uses 3-chip DLP projectors.

18. The Commission also notes from the submissions of OP 3 that D-cinema has a number of distinct features compared to E-cinema such as D-cinema uses a projector of minimum 2K or 4K, the image in D-cinema is compressed using JPEG 2000 intra-frame compression format, D-cinema offers higher quality image and sound, and it gives higher protection from piracy etc. It is submitted that movies are supplied to the theatre as a digital file called a Digital Cinema Package (‘DCP’). DCP is a collection of digital files used to store and convey digital cinema audio, image, and data streams. Generally, the file structure is organised into a number of multi-gigabyte size Material Exchange Format (‘MXF’) files which are separately used to store audio and video streams, and auxiliary index files in XML format. The MXF track files contain image and audio essence that are compressed and encoded to protect from unauthorised use. The file can be delivered on a hard drive or via satellite or though dedicated fibre optic cable. A distributor or producer can choose to encrypt the MXF files with advanced encryption standard (AES) encryption to combat piracy.

19. The key pairs used for encryption are different for every projector, so the decryption keys are generated and transmitted via a Key Delivery Message (‘KDM’) separately to the projection site. KDMs are XML files containing decryption keys that can be used only by the destination device. For all feature film content, the digital files are encrypted with the 128-bit AES algorithm to ensure that the content cannot be hacked into. A specific key for the target digital cinema server is necessary to decode the content. These keys are encrypted with an even more secure algorithm, the 2048-bit RSA (one of the first practical public-key cryptosystem widely used for secure data transmission). It is submitted that these security algorithms are fool-proof and are similar to the ones used by banks to secure their transactions. Along with the device certificate of the target server, a KDM is also generated that will allow playback of the content on the specific server for a period defined by the user while creating the KDM. To play a movie on a given server, one would require the corresponding unique KDM. If the movie files are moved to another server, one would require another KDM for that movie to play from the new server. At the time of exhibition of the content, the movie files are loaded on to a server, along with the KDM specific to that movie and that particular server. Each KDM comes with a pre-set validity period and beyond the validity period, one need to procure a new KDM if the movie is to continue to be screened. It was stated that this stringent security mechanism provides the distributor or producer an even greater level of control than that a physical print provided.

20. In 2010, the European Commission in its communication to the European Parliament on „Opportunities and challenges for European Cinema in the Digital Era‟ stated the following about DCI and its specifications:

'The Digital Cinema Initiatives (DCI) was launched in 2002 by the six US majors to define the technical specifications for digital cinema distribution. These specifications were published in July 2005 and then turned into standards by the Society of Motion Picture and Television Engineers (SMPTE). They include a resolution of 2048 1080 known as 2k (4096 2160 or 4k for screens over 15m) and JPEG 2000 as the compression format intended to allow digital cinema to offer an improved cinema experience to audiences over soon-to-be-available technologies (HDTV Broadcast, Blu-Ray and video-on-demand). These specifications also include security parameters (a significant part of the cost of the equipment). They are now being considered for adoption as voluntary international standards by the International Standard Organization (ISO) in Geneva' (Page 5).

21. The Commission further observes that in the absence of DCI specifications, each Hollywood studio would adopt its own proprietary format/ specification for screening its movies. In such a situation, theatre owners would have to invest in separate equipments compatible with the proprietary formats of different producers/ studios. This would lead to substantial increase in operating cost for the theatre owners which would in turn be passed on to the end consumer. Alternatively, to avoid investing in multiple equipments, theatre owner would invest in equipment compatible to screen/ show the content of the largest Hollywood producer. This would foreclose the market for other Hollywood studios, equipment manufacturers as well as smaller production houses; this would in turn limit the consumer choices.

22. The Informant has alleged that OP 1, a joint venture of the parent companies of OP 2 to OP 7, is a cartel and through the said cartel OPs are deciding the price of movie hall tickets by forcing the cinema owners to install expensive DCI-compliant servers and projectors. Further, OPs are also imposing their revenue sharing agreements on the cinema theatre owners which are leading to increase in ticket prices. In this regard, the Commission is of the view that the allegation of the Informant appears to have made in passing without any explanation or evidence to support the same. It is observed that the cost of equipments is not the only determining factor for the price of a cinema ticket as there are several other factors such as the genre, locality, current market price in general, ambience, etc. are also considered for determining the price of a cinema ticket. Thus, the allegation of the Informant in this regard is misconceived and is not tenable.

23. The Commission observes that the Informant has entered the digital cinema market in 2010-11. At the time of entry, it was well aware that OPs were not releasing their movies in non-DCI compliant theatres and therefore, it had the choice to opt for DCI-compliant equipment, if it wished to show Hollywood movies in its theatres. But, the Informant preferred not to use DCI-compliant technology in its theatres.

24. Moreover, as submitted by the OPs, the Informant has entered into a joint venture with United Media Works to become the third largest digital cinema integrator in India. Evidently, non-availability of Hollywood movies does not impede the growth of the Informant. Also regional movies/ markets constitute a significant portion of the Indian cinema market. A press release on their websites states that:

'K Sera Sera and UMW have a little over 5% market share individually at present. After the merger, the Company aims to capture 25% market share in the next two years and plans to spend over Rs. 100 Crore to beef up its services. The new company will distribute movies to about 600 screens in Bihar, Jharkhand, Uttar Pradesh, Gujarat, West Bengal, Karnataka, Delhi, Punjab, Haryana, Uttarakhand, Maharashtra, Himachal Pradesh, Chhattisgarh, Madhya Pradesh and Andhra Pradesh. It plans to increase the count to 2000 screens within two years and expand its footprint across southern and eastern India. There are around 5000 screens in the southern markets and are mostly Cineplex‟s. It constitutes 60% of all cinema theaters in India.'

25. The Commission further observes that Hollywood movies constitute a very small portion of the movie market in India. This is evident from the fact that in 2013 out of the total 1602 movies released in India, only 53 were Hollywood movies. Further, only approximately 5% of the total revenue earned by the Indian film industry were derived from Hollywood movies implying that the Informant would not be adversely affected if it is not able to screen the movies of OPs.

26. It is argued by OPs that they have copyright over their respective movie contents which were produced by them and the same is protected under Section 3(5) of the Act. In this regard, it may be noted that the Commission encourages competition on merit and that any kind of conduct that impedes competition in the market will come under the scrutiny of the Act. It is observed that D-cinema is different in terms of technology deployed and quality offered when compared with E-cinema and the requirement of the OPs to use DCI-compliant equipments for the purpose of protecting from piracy appears to be valid since Section 3(5)(i)(a) of the Act clearly provides that application of Section 3 shall not restrict the right of any person to impose reasonable conditions as may be necessary for protecting any of its rights conferred upon him under the Copyright Act, 1957. It is also o

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bserved that OPs have spent considerable effort to develop their films and requiring the same to be protected from any sort of other technology/ equipment that might lead to any leak/ piracy appear to be a valid reason to insist on releasing their movies through DCI-compliant equipments. They must be entitled to reasonably protect their properties from being exploited in the market. Furthermore, the averment of the Informant that consumers are deprived from watching movies of their choice because of such restriction does not appear to be a justifiable argument. A consumer has multiple choices in the market to choose from in terms of films as well as movie theatres. It is not necessary that there is a separate category of consumers who exclusively watch only Hollywood movies in E-cinema and therefore, they will be deprived of any kind of entertainment. 27. Further, OPs, during the oral hearing, have stated that DCI specifications are merely voluntary in nature and have been standardized by International Organisation for Standardisation (ISO).These specifications were published in July 2005 and subsequently turned into standards by the Society of Motion Picture and Television Engineers (SMPTE). 28. With regard to the allegation of violation of Section 3(4) of the Act, the Commission is of the view that nothing is stated in the information or submitted by the Informant which can disclose that there exists an agreement amongst OPs which can be considered as anti-competitive in terms of Section 3(4) of the Act. The information also does not disclose any case of abuse of dominant position by any of the OPs in terms of Section 4 of the Act. The Informant has alleged collective abuse of dominance by OPs vide their joint venture. Since there are no provisions for collective dominance under the Act, the matter need not be assessed on this aspect. 29. In the light of the above analysis, the Commission finds that no case of contravention of either the provisions of Section 3 or Section 4 of the Act is made out against the OPs in the instant matter. Accordingly, the matter is closed under the provisions of Section 26(2) of the Act. 30. The Secretary is directed to inform all concerned accordingly.